Subsidizing Downward Mobility

The problem with the Democrats’ proposed wage insurance program

Senior Democrats in the House and Senate are pushing a new, $3.5 billion social insurance program for workers who lose their jobs through no fault of their own. Yet unions and advocates for the unemployed are opposed to the proposal and have begged the Democrats not to move forward with it. What is going on?

The Democrats’ new program is called wage insurance, and the idea is to compensate job losers when the new job they take pays substantially less than their old one. Each year, around 15 to 20 percent of the 2.5 to 4 million Americans who lose their jobs in plant closings and permanent layoffs wind up taking new jobs with wages 20 percent or more below their old pay. Wage insurance would pay half of the wage loss, up to $10,000, for two years.

What can be wrong with giving financial assistance to the downwardly mobile? Lots of things, actually.

The first problem is targeting: by helping only a narrow band of job losers, wage insurance brings little water to the fire It targets the 15 percent of those laid off who are now reemployed full-time but experienced large wage losses, while missing the vast majority who need health insurance coverage for themselves or their families. The opportunity cost of giving $3.5 billion to this particular set of workers is significant. Millions of the unemployed have no health insurance, and a million displaced workers who had health insurance lost it in the years from 2003 to 2005. Given that catastrophic heath insurance costs are a major cause of personal bankruptcy and a huge source of anxiety, ensuring coverage for every displaced worker should be the first priority of any new assistance program.

Another targeting issue: Why provide special assistance to a group of workers who succeed in finding new jobs rather than the displaced workers who don’t — a group that’s twice as large? Who needs help more? Who has lost more? This targeting question is especially troubling. Wage insurance isn’t about helping the workers who need help the most. Rather, it is designed to encourage displaced workers to take jobs they otherwise wouldn’t, or to persuade them to cut short their job search and take a lower paying job sooner than they otherwise would have. It’s about easing and incentivizing downward mobility.

Some economists fear that wage insurance will work as a subsidy to employers like Wal-Mart and Circuit City, which, in areas with lots of displaced workers, will be able to set wages artificially low and take advantage of the wage subsidy to attract good employees. This could lead to a more general lowering of wages.

Spending money to get job losers to accept their downward mobility, rather than finding ways to help them maintain their standard of living, is short-sighted. It does the economy little good to encourage a manufacturing employee to take a retail job in which her old skills will be useless. Productivity will not be lifted, no new job will be created, and another employee who might have been happy to have that retail job will be denied the opportunity because a higher paid employee is being subsidized to take it instead. Encouraging higher-paid workers to accept downward mobility is a zero sum proposition. What happens to the worker (more likely to be a minority) who is displaced by the wage insurance recipient? Who compensates her?

Far better to do as the Scandinavians do and offer every displaced worker the opportunity to learn new skills and to train for a new job, or to return to college or community college and complete a post-secondary degree. Quality job training programs are expensive: $10,000 a year in tuition and fees would be typical, plus the cost of weekly benefits and health insurance to allow the worker to support himself or a family while in school or retraining. U.S. training programs are often failures because they try to operate on the cheap rather than make a long-term investment in real, marketable skills, and because the workers often receive too little income support to complete the program. Doing this right and making a real commitment to leave no displaced worker behind would cost tens of billions of dollars a year.

Congress has moved steadily in the opposite direction. It capped spending on training at a miserly $220 million a year, enough to help only 38,000 trade-impacted workers. Spending on all federal training programs is about half the levels of the Reagan years in terms of dollars per worker.

From an economic point of view, adding to the skills and productivity of the workforce is a better investment than merely subsidizing downward mobility. Higher productivity (output per hour of work) is the key to higher living standards. By contrast, encouraging relatively high-productivity workers to take jobs — as wage insurance does — that don’t take full advantage of their skills and experience tends to degrade the overall productivity of the workforce over time.

Why then, are leading Democrats so keen on this idea? Unfortunately, the reason has more to do with U.S. trade policy than how best to help job losers. Former Treasury Secretary Bob Rubin worries about a backlash against free trade if wage insurance isn’t passed, a message reflected in the title of Senator Chuck Schumer’s press release announcing his Senate committee hearing on wage insurance: “Wage Insurance: Way Out of Free Trade Dilemma.” A number of Democrats who favor the current policy of lowering tariff barriers to the U.S. market think that wage insurance can sugarcoat the pill of job loss and help preserve the status quo.

This seems like a gross miscalculation. Wage insurance only reminds people that they risk job loss and income loss, and assuring them that their wage loss will be cut in half for two years won’t relieve much anxiety. It’s bad policy and bad politics, too.

Ross Eisenbrey is Vice President and Policy Director of the Economic Policy Institute in Washington, D.C.